Emission Allowance

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3. Accounting Framework for Rights and Obligations of Emissions Reduction Programs The FASB’s Conceptual Framework provides guidance to standard setters for establishing authoritative guidance. We apply the Conceptual Framework to the components of cap-and-trade programs in section 3.1. Section 3.2 describes the resulting accounting treatment, including income statement effects, of cap-and-trade program rights and obligations that is implied by the Conceptual Framework. 3.1. Using the FASB’s conceptual framework to analyze compliance instruments and compliance obligations Standard setter decisions about the development of US accounting standards are guided by the FASB’s Conceptual Framework. The objective of financial reporting is to ―provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions‖ [FASB, SFAC 1, para. 34]. To achieve that objective, ―financial reporting should provide information to help investors, creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise‖ [FASB, SFAC 1, para. 37]. It should also ―provide information about the economic resources of an enterprise, the claims to those resources (obligations of the enterprise to transfer resources to other entities and owners’ equity), and the effects of transactions, events, and circumstances that change resources and claims to those resources‖ [FASB, SFAC 1, para. 40]. In the FASB’s Conceptual Framework, Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, describes the qualitative characteristics that make financial reporting information useful for making investment, credit and similar decisions—relevance, reliability and comparability. Relevant information is capable of affecting a resource allocation decision; reliable information can be counted on to represent faithfully what it purports to represent; comparable information means that similar items are accounted for the same way, and different items are accounted for differently. We apply these qualitative characteristics and the definitions of financial statement elements, described next, to reach conclusions about the accounting for cap-and-trade programs. FASB Concepts Statement No. 6, Elements of Financial Statements, defines financial statement elements as the broad classes of items that financial statements comprise: assets, liabilities, revenues and expenses. A standard setter such as the FASB analyzes commercial arrangements such as cap-and-trade programs in terms of their rights and obligations. Rights that qualify as assets are recognized as such (subject to recognition criteria, described below) and obligations that qualify as liabilities are recognized as such, again, subject to recognition criteria. FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, specifies the following criteria for the recognition of items in an entity’s financial statements (para. 63): Definitions—The item meets the definition of an element of financial statements. Measurability—The item has a relevant attribute measurable with sufficient reliability. Relevance—The information is capable of making a difference in user decisions. Reliability—The information is representationally faithful, verifiable, and neutral. We apply these recognition criteria to cap-and-trade programs by analyzing the rights and obligations that arise as a result of the program.

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3.1.1. Analysis of rights The implementation of a cap-and-trade program regulates access to a resource that previously was not restricted, thus creating rights to use that resource. This type of regulation is similar to fishing rights and import quotas. Emission allowances and credits satisfy the definition of an asset in Concepts Statement No. 6 – that is, they are ―probable future economic benefits obtained or...
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